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OUTLOOK 2023 - 9 SHARES WORTH HOLDING

INTEREST RATE HIKES COULD AFFECT VALUATIONS BUT CERTAIN NAMES
STAY STRONGER THAN EVER FEELING CONFORTABLY IN THE CRISIS

 In 2022 we witnessed a chain of global events that played a significant role into cooling down
the equity markets. The most important ones - the ongoing global supply chain problems, started in
2020, caused by COVID-19; the Russian invasion into Ukraine, triggering the energy shock; the
concerns about an upcoming food shortage; the surge of CPI; the interest rates hikes. As expected,
economic activity slowed down with some economies already on the verge of recession while equity
markets registered some of their worst days since the global financial crisis.

 The Bulgarian economy also started to show signs of deceleration with Q3’22 real annual
growth of 2.9% and inflation peaking in September at 15.6%. Unemployment rate, however, is at its
lowest levels in Bulgarian post-socialist era at 4.3% in October, while the average gross monthly wage
increased 15.8% YoY in September. Country’s budget turned to a small deficit at end-November, and
expectations are for a much smaller than planned deficit for the year. The base interest rate (set at
zero for a long time) started to increase from beginning of October.

 The banking sector is heading into a record breaking profitability with net income of BGN
1.9bn, for the 11 months of 2022 and already 12.9% higher than the best year in the history, while
lending activity remains elevated. The main reasons for the long-standing loans growth were the
decline of the interest rates, which reached new historical lows and the improved business confidence
and consumer sentiment in the post-COVID year. In 2023, we expect a slowdown of the credit activity
as interest rates will inevitably increase and affect the loans demand.

 Looking forward, all institutional forecasts are for GDP growth slowdown in 2023, but
remaining on positive territory. The growth range is between 0.1% and 1.7% with average forecast of
eight main institutions being at 1.2%. Obviously, no one is expecting recession in Bulgaria, but the
risks should not be ignored – inflation and the Central banks determination to fight it with higher
interest rates, ongoing political instability and the deterioration of consumer and business confidence.

 At the same time, the local equity market seemed quite stubborn. Without any substantial
volatility the blue-chip index SOFIX (-5.4% YoY) is closing the year with only a single digit decline
while BGTR30 (+7.1% YoY) and BGREIT (+11.7% YoY) finished in positive territory. Despite the lack
of significant price depreciation, the market looks quite cheap in historical terms with SOFIX trading at
PE around 5.4 or close to 50% discount in terms of average 5-year PE, while our stock selection is
trading at trailing PE of 5.77. This year we identified nine stocks, which offer the best upside potential
and/or could hedge against inflation